B EXERCISES. Instructions (a) Compute taxable income for 2010.

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1 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 1 B EXERCISES 5) E19-1B (One Temporary Difference, Future Deductible Amounts, One Rate, No Beginning Deferred Taxes) Allied Corporation has one temporary difference at the end of 2010 that will reverse and cause deductible amounts of $40,000 in 2011, and $70,000 in Allied s pretax financial income for 2010 is $125,000, and the tax rate is 40% for all years. There are no deferred taxes at the beginning of (a) Compute taxable income and income taxes (c) Prepare the income tax expense section of the income statement for 2010, beginning with the line (L0 2) E19-2B (Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following information is available for DirectMedia Inc. for Excess of tax depreciation over book depreciation, $80,000. This $80,000 difference will reverse equally over the next 4 years. 2. Deferral, for book purposes, of $25,000 of subscription income received in advance. The subscription income will be earned in Pretax financial income, $160, Tax rate for all years, 35%. (a) Compute taxable income for (c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2011, assuming taxable income of $255,000. 5) E19-3B (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes) At the beginning of 2010, Krypton Inc. reporting a deferred tax liability of $80,000. At the end of 2010, the related cumulative temporary difference amounts to $300,000, and it will reverse evenly over the next 4 years. Pretax accounting income for 2010 is $380,000, the tax rate for all years is 40%, and taxable income for 2010 is $280,000. (a) Compute income taxes (c) Prepare the income tax expense section of the income statement for 2010 beginning with the line 3, 5, 6) E19-4B (Three Differences, Compute Taxable Income, Entry for Taxes) Metals Corporation reports pretax financial income of $260,000 for The following items cause taxable income to be different than pretax financial income. 1. Rental income on the income statement is less than rent collected on the tax return by $65, Depreciation on the tax return is greater than depreciation on the income statement by $40, Interest on an investment in a municipal bond of $6,500 on the income statement. Metal s tax rate is 40% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of (a) Compute taxable income and income taxes (c) Prepare the income tax expense section of the income statement for 2010, beginning with the line (d) Compute the effective income tax rate for , 5) E19-5B (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate to Xylo Corporation. 1

2 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 2 2 Chapter 19 Accounting for Income Taxes (L0 6) 3, 4, 6) 1. Deferred tax liability, January 1, 2010, $0. 2. Deferred tax asset, January 1, 2010, $24, Taxable income for 2010, $265, Pretax financial income for 2010, $345, Cumulative temporary difference at December 31, 2010, giving rise to future taxable amounts, $140, Cumulative temporary difference at December 31, 2010, giving rise to future deductible amounts, $120, Tax rate for all years, 40%. 8. The company is expected to operate profitably in the future. (a) Compute income taxes (c) Prepare the income tax expense section of the income statement for 2010, beginning with the line E19-6B (Identify Temporary or Permanent Differences) Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes. For each item below, indicate whether it involves: (1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset. (2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability. (3) A permanent difference. Use the appropriate number to indicate your answer for each. (a) For some assets, straight-line depreciation is used for tax purposes while double-declining balance method is used for financial reporting purposes. (b) Warranty expenses are accrued when the sale is made, but cannot be deducted until the work is actually performed. (c) The company uses the percentage of complete method to record revenue on long-term contracts for financial reporting purposes, but the completed contract method is used for tax purposes. (d) Accelerated depreciation for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some equipment. (e) A landlord collects some rents in advance. Rents received are taxable in the period when they are received. (f) Tax-exempt income. (g) An SEC fine related to financial reporting irregularities. (h) For financial reporting purposes, an estimated loss from a lawsuit is accrued. The tax return will not report a deduction until an amount is paid. (i) (j) A liability for a guarantee is accrued for financial reporting purposes. Installment sales are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes. E19-7B (Terminology, Relationships, Computations, Entries) Complete the following statements by filling in the blanks. (a) If a $150,000 balance in Deferred Tax Liability was computed by use of a 30% rate, the underlying cumulative temporary difference amounts to $. (b) An income statement that reports current tax benefit of $63,000 and deferred tax expense of $19,000 will report total income tax of $. (c) If a taxable permanent difference originates in 2010, it will cause taxable income for 2010 to be (less than, greater than) pretax financial income for (d) If the income statement shows total income tax expense of $186,000 and deferred tax expenses of $45,000, the total taxes due on the tax return for the period are. (e) If total tax expense is $225,000 and the current expense is $155,000, then the deferred tax (expense, benefit) is $. (f) In a period in which a deductible temporary difference reverses, the reversal will cause taxable income to be (less than, greater than) pretax financial income. (g) An decrease in the Deferred Tax Assets account on the balance sheet is recorded by a (debit, credit) to the Income Tax Expense account.

3 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 3 B Exercises 3 3, 5, 9) (h) (i) (j) If a corporation s Income tax payable on the balance sheet totals $100,000, the company made estimated payments during the year totaling $40,000, and the tax rate is 40%, taxable income equals $. A valuation account the balance reported in the balance sheet for a deferred tax asset to the amount expected to be realized. Deferred taxes (are, are not) recorded to account for temporary differences. E19-8B (Two Temporary Differences, One Rate, 3 Years) Tipper Company has two temporary differences between its income tax expense and income taxes payable. The following information is available Pretax financial income $225,000 $268,000 $365,000 Excess of depreciation expense on tax return (20,000) (15,000) (20,000) Excess of warranty expense on financial income 10,000 15,000 16,000 Taxable income $215,000 $268,000 $361,000 The income tax rate for all years is 30%. (L0 8) (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2010, 2011, and (b) Assuming there were no temporary differences prior to 2010, indicate how deferred taxes will be reported on the 2011 balance sheet. Tipper s product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2011, beginning with the line Pretax financial income. (Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differ- The pretax financial income (or loss) figures for Metals, Inc. are as follows. E19-9B ences) 2007 $ 90, , , (230,000) , (50,000) ,000 Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 40% tax rate for 2007 and 2008 and a 35% tax rate for the remaining years. Prepare the journal entries for the years 2010 to 2013 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Metals, Inc. uses the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.) (L0 8) E19-10B (Two NOLs, No Temporary Differences, No Valuation Account, Entries and Income Statement) Vintage Car Corporation has pretax financial income (or loss) equal to taxable income (or loss) from 2004 through 2013 as follows. Income (Loss) Tax Rate 2004 $ 40,000 40% ,000 40% ,000 30% 2007 (86,000) 30% 2008 (93,000) 40% ,000 40% ,000 50% 2011 (135,000) 50% ,000 40% ,000 40% Pretax financial income (loss) and taxable income (loss) were the same for all years since Vintage Car has been in business. Assume the carryback provision is employed for net operating losses. In recording the benefits of a loss carryforward, assume that it is more likely than not that the related benefits will be realized.

4 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 4 4 Chapter 19 Accounting for Income Taxes 3, 9) (a) What entry(ies) for income taxes should be recorded for 2007? (b) Indicate what the income tax expense portion of the income statement for 2007 should look like. Assume all income (loss) relates to continuing operations. (c) What entry for income taxes should be recorded in 2008? (d) How should the income tax expense section of the income statement for 2008 appear? (e) What entry for income taxes should be recorded in 2011? (f) How should the income tax expense section of the income statement for 2011 appear? E19-11B (Three Differences, Classify Deferred Taxes) At December 31, 2009, Rockfellow Corp. had a net deferred tax asset of $50,000. An explanation of the items that compose this balance is as follows. Temporary Differences Resulting Balances in Deferred Taxes 1. Accrual, for book purposes, of estimated warranty costs. Warranty costs will be deducted on the tax return when paid. $ 125, Excess of tax depreciation over book depreciation (110,000) 3. Accrual, for book purposes, of an estimated litigation settlement expected to be paid in The loss will be deducted for tax purposes when paid. 35,000 $ 50,000 In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2010, and $100,000 of the temporary difference due to the warranty costs will reverse in The tax rate for all years is 40%. Indicate the manner in which deferred taxes should be presented on Rockfellow s December 31, 2009, balance sheet. 3, 5) 7) E19-12B (Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial Income) The following facts relate to Integrated Products Corporation. 1. Deferred tax liability, January 1, 2010, $225, Deferred tax asset, January 1, 2010, $162, Taxable income for 2010, $386, Cumulative temporary difference at December 31, 2010, giving rise to future taxable amounts, $838, Cumulative temporary difference at December 31, 2010, giving rise to future deductible amounts, $965, Tax rate for all years, 30%. No permanent differences exist. 7. The company is expected to operate profitably in the future. (a) Compute the amount of pretax financial income for (c) Prepare the income tax expense section of the income statement for 2010, beginning with the line (d) Compute the effective tax rate for E19-13B (One Difference, Multiple Rates, Effect of Beginning Balance versus No Beginning Deferred Taxes) At the end of 2010, Frontier Corporation has $360,000 of cumulative temporary differences that will result in reporting future taxable amounts as follows. Tax rates enacted as of the beginning of 2009 are: 2011 $105, , , ,000 $360, and % % 2012 and later 35% Frontier s taxable income for 2010 is $605,000. Taxable income is expected in all future years.

5 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 5 B Exercises 5 (a) Prepare the journal entry for Frontier to record income taxes payable, deferred income taxes, and income tax expense for 2010, assuming that there were no deferred taxes at the end of (b) Prepare the journal entry for Frontier to record income taxes payable, deferred income taxes, and income tax expense for 2010, assuming that there was a balance of $136,000 in a Deferred Tax Liability account at the end of (L0 3, 4) E19-14B (Deferred Tax Asset with and without Valuation Account) NovaSci, Inc. has a deferred tax asset account with a balance of $255,000 at the end of 2009 due to a single cumulative temporary difference of $850,000. At the end of 2010 this same temporary difference has decreased to a cumulative amount of $750,000. Taxable income for 2010 is $650,000. The tax rate is 30% for all years. No valuation account related to the deferred tax asset is in existence at the end of (a) Record income tax expense, deferred income taxes, and income taxes payable for 2010, assuming that it is more likely than not that the deferred tax asset will be realized. (b) Assuming that it is more likely than not that one-half of the deferred tax asset will not be realized, prepare the journal entry at the end of 2010 to record the valuation account. (L0 3, 4, 5) E19-15B (Deferred Tax Asset with Previous Valuation Account) Assume the same information as E19-14B, except that at the end of 2009, NovaSci, Inc. had a valuation account related to its deferred tax asset of $125,000. (a) Record income tax expense, deferred income taxes, and income taxes payable for 2010, assuming that it is more likely than not that the deferred tax asset will be realized in full. (b) Record income tax expense, deferred income taxes, and income taxes payable for 2010, assuming that it is more likely than not that one-half of the deferred tax asset will be realized. 5, 7, 9) E19-16B (Deferred Tax Asset, Change in Tax Rate, Prepare Section of Income Statement) Sky Time Media Corporation s only temporary difference at the beginning and end of 2009 is caused by a $2.5 million litigation accrual that is expected to be settled in The related deferred tax asset at the beginning of the year is $1,000,000. In the third quarter of 2009, a new tax rate of 45% is enacted into law and is scheduled to become effective for Taxable income for 2009 is $7,250,000, and taxable income is expected in all future years. (a) Determine the amount reported as a deferred tax asset at the end of Indicate proper classification(s). (b) Prepare the journal entry (if any) necessary to adjust the deferred tax asset when the new tax rate is enacted into law. (c) Draft the income tax expense portion of the income statement for Begin with the line Income before income taxes. Assume no permanent differences exist. 3, 7) E19-17B (Two Temporary Differences, Tracked through 3 Years, Multiple Rates) Taxable income and pretax financial income would be identical for Ursula Co. except for its depreciation on equipment purchased in 2009 for $500,000 and estimated costs of warranties. The following income computations have been prepared. Taxable income Excess of revenues over expenses (excluding two temporary differences) $ 265,000 $ 630,000 $ 250,000 Tax Depreciation (125,000) (200,000) (175,000) Expenditures for warranties (10,000) (50,000) (15,000) Taxable income $ 130,000 $ 380,000 $ 60,000 Pretax financial income Excess of revenues over expenses (excluding two temporary differences) $ 265,000 $ 630,000 $ 250,000 Book depreciation (100,000) (100,000) (100,000) Estimated cost of warranties (75,000) 0 0 Income before taxes $ 90,000 $ 530,000 $ 150,000 The tax rates in effect are: 2009 and 2010, 30%; 2011 and thereafter, 40%. All tax rates were enacted into law on January 1, No deferred income taxes existed at the beginning of Taxable income is expected in all future years.

6 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 6 6 Chapter 19 Accounting for Income Taxes Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2009, 2010, and , 7) E19-18B (Three Differences, Multiple Rates, Future Taxable Income) During 2010, Cumpuinc s first year of operations, the company reports pretax financial income at $231,000. Cumpuinc s enacted tax rate is 40% for 2010 and 2011 and 30% for all later years. Cumpuinc expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2010, are summarized below. Future Years Total Future taxable (deductible) amounts: Warranty costs $(20,000) $(60,000) $(25,000) $(105,000) Depreciation (20,000) 12,000 12,000 $12,000 $12,000 28,000 Installment sales 60,000 75, ,000 (a) Complete the schedule below to compute deferred taxes at December 31, Future Taxable December 31, 2010 (Deductible) Tax Deferred Tax Temporary Difference Amounts Rate (Asset) Liability Warranty costs $(105,000) Depreciation 28,000 Installment sales 135,000 Totals $ 3, 9) 3, 9) (b) Compute taxable income for (c) Prepare the journal entry to record income tax payable, deferred taxes, and income tax expense for E19-19B (Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income) Low4All Stores establishes a $200 million liability at the end of 2010 for the estimated costs to settle a class-action lawsuit alleging discrimination. The settlement is expected to be approved by the Court in 2011 at which time the settlement will be paid. The company also has $125 million of temporary differences the end of 2010 due to installment sales. The $125 million will reverse in equal installments over the next five year. The enacted tax rate for all years is 40%, and the company has $351 million of taxable income in Low3All Stores expects to have taxable income in (a) Determine the deferred taxes to be reported at the end of (b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet. (c) Assuming that the only deferred tax account at the beginning of 2010 was a deferred tax liability of $60 million; draft the income tax expense portion of the income statement for 2010, beginning with the line (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $60 million deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, then (3) the amount of pretax financial income.) E19-20B (Two Differences, No Beginning Deferred Taxes, Multiple Rates) Education Sciences Company, in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of Book Basis Tax Basis Equipment (net) $800,000 $750,000 Estimated warranty liability 150,000 0 It is estimated that the warranty liability will be settled in 2011 ($100,000) and 2012 ($50,000). The difference in equipment (net) will result in taxable (deductible) amounts of $(200,000) in 2011, $(150,000) in 2012, and $200,000 in 2013 and The company has taxable income of $350,000 in As of the beginning of 2010, the enacted tax rate is 40% for 2010 and 2011, and 35% for 2012 and thereafter. Education Sciences expects to report taxable income through 2014.

7 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 7 B Exercises 7 (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of , 7, 9) E19-21B (Two Temporary Differences, Multiple Rates, Future Taxable Income) Jones Clothier Inc. has two temporary differences at the end of The first difference stems from installment sales, and the second one results from the accrual for costs associated with closing a factory. Jones s assistant controller developed a schedule of future taxable and deductible amounts related to these temporary differences as follows Taxable amounts $ 80,000 $80,000 $60,000 $40,000 Deductible amounts (150,000) (60,000) $ (70,000) $20,000 $60,000 $40,000 As of the beginning of 2009, the enacted tax rate is 40% for 2009 through 2011, and 30% for 2012 through At the beginning of 2009, the company had no deferred income taxes on its balance sheet. Taxable income for 2009 is $150,000. Taxable income is expected in all future years. (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for (b) Indicate how deferred income taxes would be classified on the balance sheet at the end of , 9) E19-22B (Two Differences, One Rate, First Year) The differences between the book basis and tax basis of the assets and liabilities of Host Five Inc. at the end of 2010 are presented below. Book Basis Tax Basis Accounts receivable $180,000 $ 0 Warranty accrual 120,000 0 It is estimated that the warranty accrual will be settled in 2011 ($75,000) and 2012 ($45,000). The difference in accounts receivable will result in taxable amounts of $60,000 in 2011, 2012, and The company has taxable income of $200,000 in 2010 and is expected to have taxable income in each of the following 3 years. Its enacted tax rate is 35% for all years. This is the company s first year of operations. (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of (L0 4, 7, 8) E19-23B (NOL Carryback and Carryforward, Valuation Account versus No Valuation Account) Public Wares Corporation reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss and 2009 is the company s first year of operations.) Year Pretax Income (Loss) Tax Rate 2009 $230,000 40% 2010 (335,000) 40% 2011 (50,000) 35% ,000 30% The tax rates listed were all enacted by the beginning of (a) Prepare the journal entries for the years 2009 through 2012 to record income tax expense (benefit) and income tax payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that the benefits of any loss carryforwards are judged more likely than not to be realized in the future. (b) Prepare the income tax section of the 2010 income statement beginning with the line Operating loss before income taxes. (c) Prepare the income tax section of the 2011 income statement beginning with the line Operating loss before income taxes.

8 JWCL163_ch19_01-08.qxd 8/3/09 3:32 PM Page 8 8 Chapter 19 Accounting for Income Taxes (L0 4, 7, 8) E19-24B (NOL Carryback and Carryforward, Valuation Account Needed) Assume the same information as E19-23B, except that based on the weight of available evidence in 2010, it is more likely than not that 40 percent of the benefits of any loss carryforward will not be realized. In 2011, the benefits of any loss carryforwards are judged more likely than not to be realized in the future. (a) Prepare the journal entries for the years 2009 through 2012 to record income tax expense (benefit) and income tax payable (refundable) and the tax effects of the loss carryback and carryforward,. (b) Prepare the income tax section of the 2010 income statement beginning with the line Operating loss before income taxes. (c) Prepare the income tax section of the 2011 income statement beginning with the line Operating loss before income taxes. (L0 4, 7, 8) E19-25B (NOL Carryback and Carryforward, Valuation Account Needed) Topper Company reported the following pretax financial income (loss) for the years 2009 through $ 70, , (260,000) , ,000 Pretax financial income (loss) and taxable income (loss) were the same for all years involved. The enacted tax rate was 30% for 2009 through 2011, and 35% for 2012 and thereafter. Assume the carryback provision is used first for net operating losses. (a) Prepare the journal entries for the years 2009 through 2013 to record income tax expense, income tax payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that 60 percent of the benefits of the loss carryforward will not be realized. (b) Prepare the income tax section of the 2011 income statement beginning with the line Income (loss) before income taxes.